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Budget Brief 2014-15
Salient Features of Revenue Measures 2014-15
Revenue measures of Rs. 231 billion announced:
Income Tax
Rs. 144 Billion
Sales Tax
Rs. 51 Billion
Customs Duty
Rs. 36 Billion
Two-third of new measures relate to Income Tax, i.e., Direct Taxes
Share of Direct Taxes shall increase from 36% to 37.5%
Close to half of the revenue measures are based on withdrawal of
concessions i.e. over Rs. 100 billion
New Taxes:
on un-covered sectors
To reduce distortions
Plug loopholes
Tax high income and expenditure
Increase the cost of doing business for the non-compliant i.e. one
who does not file his I.T. return
No new taxes on common man
No new taxes on food items
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Proposed Relief Measures
• To encourage industrialization and to promote fruit processing in Gilgit-Baltistan, Baluchistan and Malakand Division, exemption of customs duty and sales tax on import of plant,
machinery & equipment
• To encourage industrialization in FATA, plant, machinery and equipment for industries in FATA to be exempt from customs duty and sales tax
• To reduce input cost for industries, customs duty on PET coke as an alternate fuel to coal to be reduced from 5% to 1%
• Exemption from customs duty and sales tax on import and supply of high efficiency irrigation equipment and greenhouse farming equipment for agriculture sector
• Reduce rate of sales tax on local supply of tractors from 16% to 10%
• Reduced rate of FED on telecommunication services from 19.5% to 18.5% and withdraw FED from provinces where the GST on telecom services has been levied
• Reduced withholding tax on telecom services from 15% to 14%
• Encouraging Foreign Direct Investment by reducing the corporate tax for foreign investment from 33% to 20% for five years
• Rationalization of Capital Gains Tax for sustaining buoyancy in capital markets: from 17.5% to 12.5% for holding period up to 12 months, 10% for holding period of more than 12 months and up to 24 months
• Reduction in corporate tax rate from 34% to 33%
• 50% reduction in tax liability of a disabled person
• Repeal of Income Support Levy Act, 2013
• Taxation of Joint Venture in which one member is a company- Company to be taxed separately from the AOP in its corporate capacity
• Reduction of advance tax on functions/gathering from 10% to 5%
• Exemption from Income Tax to Sindh Pension Fund
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Explanatory notes to
budgetary measures for Income Tax
proposed in Finance Bill 2014
I.
Incentives for Less Developed Areas, Agriculture and Investment:
Five years tax exemption for food processing plants in certain areas:
Locally grown fruits in Baluchistan Province, Malakand Division, Gilgit Baltistan and FATA are of high quality but due to absence of any fruit processing units, these perishable items get wasted before reaching the market. In order to encourage investment in this sector, it has been proposed that income derived by a taxpayer from plants set up in these areas for processing locally grown fruits be made exempt for a period of five years if the plant is set up by 30.06.2017.
Exemption from Income Tax to coal mining projects in Sindh supplying coal exclusively to power generation projects, and reduced rate on dividends distributed by them:
The government is taking all possible measures to tackle the current energy crisis in the country using indigenous resources. The ECC in its decision in case on 28.05.2014 approved exemption to coal mining projects supplying coal exclusively to power generation projects, and also the tax on dividends to be reduced to 7.5% in case of dividends declared by such a company. It has therefore been proposed to exempt the profits and gains of coal mining projects supplying coal exclusively to power generation projects and also to tax their dividends at reduced rate of 7.5%.
Rationalization of Capital Gains Tax for sustaining buoyancy in capital markets
A star performer of Pakistani economy during the FY 2013-14 has been the stock market. The rate for payment of Capital gain Tax shall stand increased from 10% to 17.5% w.e.f. 1st July 2015 in case of securities held for a period less than six months. Stock markets as well as investors were
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demanding to review such high increase in order to save the capital markets from withdrawal of investments and resultant collapse. In order to ensure continued buoyancy prevailing at present without causing a huge loss of revenue to exchequer, CGT rates have been rationalized. Now for the tax year 2015, rate of CGT has been proposed to be 12.5% for securities held up to 12 months and 10% for securities held for a period which is less than 24 months but more than 12 months.
Encouraging Foreign Direct Investment:
To attract foreign investment, if 50% of the cost of a project including working capital is through own equity foreign direct investment, it is proposed that corporate tax rate be reduced to 20% for the first five years, from the date of setting up or commencement of commercial production, whichever is later. To qualify for this scheme, it has been proposed that the company must invest in a new industrial undertaking to be set up by 30.06.2017
Reduction in corporate tax rate from 34% to 33%:
In order to encourage documentation and corporatization, the Government had committed last year to bring corporate tax rate down by one per cent. In line with the policy of the Government, it has been proposed to reduce the corporate tax rate from 34% to 33% for Tax Year 2015.
50% reduction in tax liability for disabled persons:
At present, tax liability of person aged 60 years or more is reduced by 50% if the taxable income is up to 01 million. The same relief has been proposed to be extended to persons who hold a Computerized National Identity Card for disabled persons issued by the National Database Registration Authority.
Repeal of Income Support Levy 2013:
Income Support Levy Act was promulgated through the Finance Act, 2013. The aim was to provide resources for the economically distressed persons. However, this was considered harsh and
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perceived as double taxation. It has therefore been proposed to repeal the Income Support Levy Act, 2013.
Taxation of Joint Venture in which one member is a company
The non-resident companies investing in Pakistan generally create a joint venture with a local entity and the resultant joint venture can be treated as a resident Association of Persons. The contract receipts of such joint ventures can be subjected to final tax in the hands of the joint venture. The non-resident companies were therefore effectively not able to retain their status as non-non-resident. To facilitate the non-residents and attract foreign investment, it is proposed that if one member of the joint venture is a company, it should be taxed separately at the applicable rate while the remaining individual members, if any, should be taxed as an AOP separately.
Exemption from income tax to Pak-China Withholding Company:
“PSA Gwadar PTE Limited” was granted exemption from income tax for a period of twenty years through S.R.O 755(I)/2007 dated 27.07.2007 on the basis of concession agreement dated 06.02.2007. The ECC in its decision in case No. ECC-90/14/2014 dated 28.05.2014 had approved the transfer of tax exemption from “PSA Gwadar PTE Limited” to “China Overseas Ports Holding Company Limited” as per transfer of concession agreement dated 16.05.2013. The concessions earlier granted to PSA Gwadar PTE Limited” through agreement dated 06.02.2007 are proposed to be transferred to “China Overseas Ports Holding Company Limited” for the remaining period.
Reduction of advance tax on function/gathering from 10% to 5%
In the last Finance Act, Advance Tax on functions and gatherings was levied @10% of the amount of bill. Since most of the marriages and other functions are now held in marriage or banquet halls including the functions arranged by the middle and the lower middle classes, hence this levy hit hard these sections of the society who agitated that the Rate of tax is on the higher side . Accepting the general demand, the rate has been proposed to be reduced to 5%.
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Reduction in rate of income tax withheld from mobile phone subscribers
Rate of income tax withheld from mobile phone subscribers is proposed to be reduced by 1% to 14%.
Exemption from income tax to Green star Social Marketing Pakistan (Guarantee) Limited:
Greenstar Social Marketing Pakistan (Guarantee) Limited is a non-profit organization and it is engaged in controlling population explosion in Pakistan by providing contraceptives at subsidized rates. In view of the importance and contribution of the organization in controlling population explosion, it is proposed to exempt its income by including its name in the list of exempt organizations given in clause (66), Part I of the Second Schedule.
Exemption from Income Tax to Sindh pension:
On request of the Government of Sindh and in view of its contribution to the pensioners, income of Sindh Pension Fund has been proposed to be exempted from the Income Tax.
Reduction in rate of income tax on flying allowance paid to pilots:
The lower rate of tax of 2.5% applicable to the flying allowance of pilots, taxed as a separate block, was restricted to amount equal to one basic salary through Finance Act 2013. In view of hardship caused, it has been proposed that the entire amount of flying allowance exceeding an amount equal to the basic salary be taxed at a concessional rate of 7.5%. The balance income shall be taxed at normal rates applicable to salary income.
Exclusion of non-resident members of professional association from filing of returns:
As per an amendment brought through the Finance Act, 2013, any person who is a member of a professional body or trade association is also required to file return of income. This requirement has caused hardship to those members of associations who are non-residents and derive no Pakistan-source income. Accordingly, an amendment has been proposed to be made in the relevant section to exclude such persons from such mandatory requirement of filing of return.
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The main objective of a Taxation system is to provide financial resources for the state that be used for funding the necessary services to the citizens. A tax system has to be equitable and efficient. The modern economy is becoming increasingly complex with prevalence of multinational companies, cross-border investments, on-line businesses and complex financial instruments.
As the Income Tax laws have to cater to all the complexities of a modern economy, these laws tend to be complex with arcane provisions and unintended consequences. Often this leads to opportunities for tax arbitrage and tax avoidance by exploiting loopholes resulting from making tax law hospitable to a wide range of economic activities.
Exploiting opportunities in tax laws through extensive tax planning might be very lucrative, however, such activities provide little to no social or economic value to the broader economy. Society is much better off if that effort is diverted to engaging in activities that are productive and create economic growth and employment.
The tax structure should not unintentionally create incentives that make businesses prefer one way of doing business over the other. The businesses should only make decision on the basis of objective economic considerations.
Over the years, incentives have crept in to the Income Tax laws that make certain financial transaction or economic activities much more attractive than other, resulting in explosive growth in some activities at the cost of other. This is not desirable. Effort has been made through budgetary measures proposed this year to level the playing field again by removing such distortions still keeping such activities attractive. Such measures are listed below:
Misclassification of income
Taxpayers can earn income from Government Securities, Capital Gains, bank deposits, leasing etc. either directly or through modarabas and mutual funds. If income is earned through modarabas or mutual funds, its class and character is changed to dividend income and the rate of dividend is applicable to it. For example, if a bank and a public company invest directly in government securities, they will be taxed at 35% & 34% respectively. However, if the same investment is routed through a mutual fund, the bank and public company will be taxed at the rates of 25% and 10% respectively. This is due to the reason that character of income is changed from interest to that of dividend when the investment is through a mutual fund which is taxed at a lower rate. In order to discourage tax avoidance and prevent loss of revenue, it has been proposed that the rate be applicable to the
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dividend distributed by Mutual Fund and Modarabas as is closer to the rate of tax on nature of income received by Mutual Fund. However, to incentivize these sectors, the rate of interest income distributed to companies shall be 25% instead of 35%.
Expense allocation of banking companies
Business income of banks consists of mark-up, dividend and capital gains. Tax rate for mark-up is 35%, for dividend it varies from 10% to 25% and for capital gains it is 10%. Banks claim most of their expenses against mark-up income so as to reduce the incidence of taxation, as mark-up income has highest tax rate. For fair taxation, it has been proposed that proportionate allocation of expenses in the case of banks be stipulated in law, as is already the case in non-banking businesses.
Alternative corporate tax
To discourage perpetual declaration of losses or very low income using tax avoidance means by companies, an alternate corporate tax at the rate of 17% is proposed to be imposed on accounting income excluding the exempt income w.e.f Tax Year 2014. The companies shall have to pay ACT or corporate tax whichever is higher. In order to facilitate companies that have genuinely low income for some period of time, the ACT paid has been proposed to be carried forward up to 10 years.
Rationalization of rates of tax deduction on services
At present the rates for deduction of tax on services are 6% and 7% for corporate and Non-Corporate taxpayers respectively. Considering that persons providing or rendering services usually enjoy high profit margins due to low costs, and that the share of services sector in revenue is much lower than its share in GDP, the existing rates appear to be on lower side as compared to companies, salaried individuals and persons having business. Hence to rationalize, tax rates on services has been proposed to be increased to 8% in case of corporate taxpayers and 10% in other cases.
Relatedly, in order to streamline the taxation of sportsmen on contract, which had been subject of litigation, it has been proposed to make the existing law in line with the court decisions to tax it as contract and enhance the rate to 10% as in case of other persons rendering services.
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Tax is deducted under Eighth Schedule in respect of securities defined in section 37A. However, debt securities are not included in this definition. In order to ensure deduction of tax on capital gains on debt securities, it has been proposed that debt securities be included in the definition of securities. However, companies shall be excluded from the application of section 37A under the Eighth Schedule.
Reduction in depreciation allowance on buildings
Buildings, generally, have a useful life of more than twenty years which means that the annual allowance should be around 5%. However, buildings have initial depreciation allowance of 25% and normal annual depreciation allowance of 10% due to which tax losses are being declared. The rate of initial depreciation on buildings has been proposed to be reduced to 10%.
Change in regime of non-profit organizations
It has been proposed that a new regime for NPOs be stipulated in law where exemption of NPOs be eliminated and instead 100% tax credit be allowed on filing of Return of income. This will result in better enforcement of withholding tax provisions and document an exempt sector.
Compulsory registration in certain cases
In order to broaden the tax base it has been proposed that commercial or industrial connections may not be provided unless the person applying for the same holds an NTN.
Airlines to be withholding agents for domestic air tickets
Currently travel agents are withholding agents for the advance income tax collected on purchase of domestic air tickets under section 236C of Income Tax Ordinance 2001. In order to facilitate enforcement and prevent loss of revenue it has been proposed that airlines be made withholding agents.
Removing anomalies in exemption from section 148 on import of raw materials
Exemption from tax on import of raw material by an industrial undertaking was allowed through Finance Act, 2013. Procedure for issuing exemption certificate was provided separately through a circular which was challenged before courts on the ground of being ultra vires. In order to
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remove the anomalies and streamline the law, clause (72B), Part IV of Second Schedule has been proposed to be substituted by a new clause specifying the conditions and procedure for exemption from section 148 in case of industrial undertakings importing raw material.
III.
Increasing cost of doing business for non-compliant
It has been a long time gripe of taxpayers that the lax enforcement of tax law means that the cost of doing business for a person who pays taxes is higher than the cost of doing business for a person who does not pay taxes. In view of legitimateness of this complaint and in view of the benefits to the society from the state having ample revenues to provide services to citizens, several measures have been proposed this year that are aimed at promoting tax culture.
This has been done by proposing higher rate of taxes for non-filers i.e, persons who have not filed returns for preceding year, as compared to filers. If the non-compliant do not want to comply with tax laws, they have to accept payment of advance adjustable income tax on certain transactions. However, to provide a fair and equitable system, the non-compliant have an option to claim refund or adjustment of such advance tax paid at any time by filing return, or they can avoid payment of this tax by prior filing of return.
Adjustable advance tax on first/club class international air tickets
In order to broaden the tax base, document high expenditures and to encourage filing of return, collection of advance income tax at the rate of 3% on purchase of international air tickets in club/executive/first class has been proposed. In case of non-compliant persons (i.e., those who have not filed their return for the preceding tax year) the rate shall be six percent.
Adjustable advance tax on purchase of immovable property
In order to broaden the tax base, document high expenditures and to encourage filing of return, collection of advance income tax at the rate of 1% of consideration paid on purchase of immovable property above Rs. 3 Million has been proposed. In case of non-compliant persons the rate of tax shall be 2%.
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In order to broaden the tax base, document high expenditures and to encourage filing of return, collection of advance income tax from high end consumers of electricity at the rate of 7.5% on domestic electricity bills of more than Rs.100,000 has been proposed.
Increasing cost of non-compliance with tax laws
In order to promote tax culture, to discourage non-compliance with tax laws and to address the concerns of citizens paying due taxes and resultantly having higher cost of doing business than tax evaders, several measures have been taken to increase the cost of non-compliance with the tax laws. Accordingly, it has been proposed that an additional advance adjustable income tax be collected from persons who do not file income tax returns on certain transactions. The rate of such advance tax is proposed to be 5% for dividend income, 5% for interest income above Rs.500,000, 0.2% for cash withdrawals from banks, and 0.5% in case of advance capital gain tax collected from seller of immovable property. Any person can avoid payment of this advance tax by prior filing of return or claim adjustment or refund of this tax by filing return after the payment.
Adjustable advance tax on purchase/registration of new private vehicles
Currently advance income tax is collected at the time of registration of new locally manufactured private motor vehicles by Excise and Taxation Departments. No such tax is collected on registration of imported vehicles. It has been proposed that tax at the same rate be collected by the manufacturers of motor vehicles. If the person registering a motor vehicle for the first time is the same person who purchased the car locally or imported it, and paid tax at that stage, then the Excise and Taxation Departments will not collect the advance tax at the time of registration. Otherwise advance tax at the time of registration will be collected. In addition, currently the highest rate of tax is for vehicles above 2000CC. It has also been proposed that two higher slabs may be added for vehicle from 2501 to 3000cc and above 3000cc with higher rates of tax. In case of non-compliant persons (i.e., those who have not filed their return for the preceding tax year) the rate shall be double that for the complaint taxpayer.
Rationalization of rates of advance income tax on motor vehicles under section 234
Rates of adjustable advance income tax collected with Motor Vehicle Tax from private cars under section 234 were last revised in 2008. In order to account for inflation the rates are proposed to
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be revised and brought closer to the tax collected by provincial motor vehicle authorities. In case of non-compliant persons (i.e., those who have not filed their return for the preceding tax year) the rate shall be double that for the complaint taxpayer.
Adjustable advance tax on transfer of private vehicles up to five years
It has been proposed that advance income tax be collected by Excise and Taxation Departments on transfer of private motor vehicles up to a period of 5 years. The rate of tax will be same as that for registration of a new motor vehicle and will be reduced by 10% in each of the subsequent years.
IV.
Removing exemption to special interest groups
Exemptions are often at the behest of interest groups having the power and influence to manage changes in tax structure for their benefits. These exemptions serve as entry barrier for SMEs, give preferential treatment to big stakeholders, and sometimes create a de-facto licensing regime.
Even when exemptions are granted for legitimate reasons to protect or promote certain sectors they are seldom reviewed. Eventually they outlive their useful life and lose any productive utility. Sectors continue to be exempt long after they are well established and do not need the support they received from taxpayers in the form of exemption from payment of tax. This makes these sectors un-competitive, in-efficient and adverse to modernisation.
An extensive study of exemptions was carried out this year and several exemptions no longer required have been proposed to be deleted.
Increase in rates of tax deducted from advertising agencies
Commission agents are taxed under Final Tax regime at the rate of 10% on commission paid. For advertising agents, the rate of tax is 5%. It has been proposed that 10% rate, as is applicable to other commission agents, be applied, to advertising agents as well.
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Income of Foreign News Agencies is not exempt under the Ordinance. However, payments to these agencies are exempt from withholding tax. As agencies are not present in Pakistan, their agents do not file returns and income escapes assessment. It is proposed that, exemption from deduction of withholding tax be withdrawn.
Large trading houses to withhold tax from suppliers
Large Trading Houses have been exempted from withholding tax under section 153 on supply of goods. At present neither their tax is being deducted on sales made to them nor are they deducting tax as withholding agent. Exemption from withholding tax was envisaged as recipient of payment for sales made by them but not as a payer. It has been proposed that this may be clarified.
Withdrawal of exemption to hamdard laboratories
Hamdard Laboratories is exempt from income tax as a special case. However, since it is being run on commercial basis, it has been proposed that the exemption may be withdrawn.
Revampng the exemption of mutual funds
Mutual Funds are exempt from income tax if they distribute at least 90% of their income on the basis that these are only pass-through entities and earn income on behalf of investors. However, the Mutual Funds often distribute income through bonus units, and due to certain rules relating to taxation of bonus shares, almost no tax is paid on the income distributed by Mutual Funds. It has therefore been proposed that mutual funds be required to distribute income only in cash (as in case of Modarbas), which will be liable to withholding tax @ 10%.
Taxation of bonus shares
A company has the option to issue dividend or bonus shares to its share holders. In case of issuance of dividend, tax is deducted @ 10% in the hands of share holders but no tax is deducted or payable on issuance of bonus shares. This is due to the reason that bonus shares were excluded from the definition of income. However, tax on capital gain is to be charged at the time of disposal of these shares with cost equal to zero. Taking advantage of complex CGT rules (cost staggering, FIFO etc.), tax is being avoided and almost negligible CGT is being paid. During previous year, a huge amount of bonus shares were issued in lieu of dividends, however, neither tax on dividends nor on capital gains
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was received. It has therefore been proposed that bonus shares be treated as dividend and tax collected at the rate of 5% of the ex-bonus price of the shares.
Taxation of foreign institutional investors (FIIs)
Eighth Schedule relating to taxation of securities but is not applicable to foreign institutional investors investing in the stock, and NCCPL is not required to collect tax from them. The non-residents are not exempt from capital gains tax under the bilateral treaties for avoidance of double taxation. There is no provision of capital gains tax in Pak-US Treaty meaning that it is to be taxed as per Pakistan law. In the Pak-UK Treaty, it is to be taxed in the state where it arises which means it is to be taxed in Pakistan. The FIIs neither pay tax voluntarily by filing returns nor is tax deducted from them at source. Hence, it has been proposed that NCCPL may be required to collect tax from FIIs.
Making exemptions transparent
Transparency is a very important for good policy making. Currently, exemptions, including reduced rates, are scattered in a number of clauses in different schedules and within body of law. An effort has been made to delete all the redundant and time barred clauses. All the different rates prescribed for a certain type of income that were scattered throughout the Ordinance have been consolidated in one place. This will reduce the unwieldiness of the law and make the exemptions more open and transparent making it easy to review different regimes more frequently.
Sales Tax & Federal Excise
• Add Retail Sector to the tax-net
• Review and rationalization of SROs
• Rectification in special regimes
– Steel
– Beverages
Proposals for Bringing the Non-compliant Sector into Tax Net
Retailers : Two tier SystemFirst Tier
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– Retail outlets operating as part of national or multinational chains
– in air-conditioned malls
– having debit or credit cards
– consuming electricity exceeding Rs. 50,000 per month
shall be required to be registered in Sales Tax , have electronic cash register and pay Sales Tax on actual basis.
Second Tier
All other outlets shall be subject to
– Sales Tax to be charged @ 5% on electricity bills up to Rs. 20,000 and @ 7.5% for bills exceeding Rs. 20,000
Steel Sector: Rate of Sales Tax increase from Rs. 4/unit to Rs. 7/unit of electricity.
Federal Excise Duty - Proposed Revision of Federal Excise Duty
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Revisiting of rates:
Cigarette
Current Retail Price Current FED rate
Proposed retail price Proposed FED rate
Locally produced cigarettes If retail price exceeds Rs. 2286 per thousand cigarettes
Rs 2325 per thousand cigarettes
Locally produced cigarettes if retail price exceeds Rs. 2706 per thousand cigarettes.
Rs. 2632 per thousand cigarettes Locally produced
cigarettes if retail price does not exceed RS 2286 per thousand cigarettes
Rs 880 per thousand cigarettes
Locally produced cigarettes if retail price does not exceed Rs. 2706 per thousand cigarettes.
Rs. 1085 per thousand cigarettes
Sector Existing Proposed
Cement Rs 400/MT 5% of Retail Price. The maximum possible burden of tax will not be
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more than 4.5/bag. However it is expected that the cement
manufacturers will absorb this increase against concession given on PET-coke
International air travel
Rs 3840 (Economy & Economy Plus) Rs 6840 (Club, Business and First Class)
Rs 5000 (Economy & Economy Plus) Rs 10,000 (Club, Business and First Class)
Chartered flights Nil 16% of full amount charged
